Explore the Impacts, Implications and Possible Solutions to Changing Compensation Models
Note: This blog was updated with new information and insights on August 20, 2024. It was originally published on April 16, 2024.
Meeting the Challenges of Today’s U.S. Real Estate Market
Exploring the impacts, implications and possible solutions to changing compensation models for real estate professionals.
This is Part II of a two-part blog series about U.S. real estate trends. Part I focuses on general market trends, impacts to mobility programs and possible policy adjustment solutions – check it out here.
Amid calls for greater transparency and concern about high U.S. housing transaction costs, the way mobile employees and mobility managers work with real estate agents is changing. Since many U.S. real estate professionals are members of the National Association of Realtors® (NAR), agents and brokers were bound until recently to the association’s cooperative compensation rule, which stated in the listing the amount of commission a buyer’s agent would receive from the seller as a condition of inclusion on Multiple Listing Services (MLS).
While NAR maintains that commissions for real estate professionals always have been negotiable, this rule became the focus of lawsuits and NAR reached a settlement that changes the way buyers and sellers work with and compensate real estate agents. As of August 17, Multiple Listing Services owned by NAR-affiliated entities and those that have opted into the settlement must be compliant with the settlement terms, although some states rolled out new processes in advance of the deadline.
This adds another layer of complexity to the relocation process and creates more decisions for companies and mobile employees to navigate. To ensure positive relocation experiences, mobility professionals will need to be able to explain the implications of the new rules for employees’ home purchase or sale processes – and provide guidance on what choices may be best for each mobile employee.
Graebel continues to play an active role in the industry as this news progresses. Here are insights into the evolving real estate professional compensation landscape, potential impacts to relocations and possible solutions Graebel is helping its clients explore.
Changes to the Real Estate Professional Compensation Model
There are three primary agent compensation changes outlined in the NAR settlement that will shift the way homes are bought and sold in the U.S.:
- Commission negotiation. Traditionally, home sellers have paid for both the commissions to their own agent and also to the buyer’s agent. Under the new rules, commission percentages and amounts for each home purchase and sale will need to be negotiated on a case-by-case basis among the sellers, buyers and their respective agents. This could mean anything from sellers continuing to pay commissions to their agents and the buyers’ agents, to buyers paying their agents’ commissions – it’s all up for discussion.
- Commission displays. Brokers can no longer display a commission rate to buyers’ agents on MLS listings; instead, buyers must be part of compensation negotiations. Some sellers may choose not to compensate buyers’ agents, leaving agents and buyers to work it out on their own. Some buyers may choose a more limited menu of buyer agent services, to reduce their costs versus a traditional commission. All of this adds another layer of complexity and uncertainty, as buyers won’t have a full picture of the cash needed at closing until after negotiating with sellers, the listing agent and their agent.
- Buyer agency agreements. Moving forward, buyers will be required to sign a buyer agreement with their real estate broker, outlining services, expectations and compensation. These agreements will vary state by state, adding still more complexity. While the widespread adoption of such agreements is new, the concept is not – prior to the NAR settlement, many states already had buyer agency agreement requirements. Also keep in mind that mobile employees with active purchase or listing agreements likely will need to do new paperwork to be compliant with the changes.
Implications for Talent Mobility Programs and Mobile Employees
The biggest question circulating throughout the industry is, “What do these changes mean for my mobility program and mobile employees?”
While the situation will become clearer in late 2024, as the new regulations play out, there are a few implications mobility managers should outline for mobile employees, depending on each company’s relocation benefit policies. Mobile employees who are eligible for generous home sale or purchase benefits may not face these challenges, whereas employees whose benefits are less comprehensive – for example, lump sum assignees – may need more information or guidance:
- For buyers, the changes may mean added expense to cover the cost of a real estate agent’s services formerly paid for by the seller, depending on how commissions are negotiated. Buyers may need more cash at closing to cover their agent’s commission, in addition to the downpayment and other closing costs. They may need to negotiate this with sellers, the listing agent or their own buyer agent. All of this adds ambiguity and worry to the transaction. However, many buyers feel that having an agent’s support and expertise is important for creating a positive experience. Agents can help guide families towards smart decisions, while writing the contract, negotiating the sales price, handling inspections and contingencies and managing other parts of the home buying process.
- For sellers, they may pay less if they choose not to pay a commission to the buyers’ agent. But not compensating buyers’ agents may mean the home requires extended marketing time or sells more slowly or for less than the original asking price, if the seller’s relocation benefits program does not include their company paying a listing and buyer agent commission.
- The terms of every buyer-broker agreement could be different based on negotiations; mobile employees should understand potential agreement structures and impacts. Some agreements may include a more a la carte approach – paying a flat fee for an agent’s time – while others may create a more traditional agent-buyer partnership. Before mobile employees sign any buyer agency agreements, they should consult with their company’s relocation management company (RMC).
RMCs and mobility professionals need to communicate with mobile employees about changing real estate professional commission rules and offer guidance on how to navigate the new buying and selling landscape, including resources for information and assistance, and which benefits are and are not offered. It’s important to reinforce that even the most seasoned home buyers and sellers will experience new processes moving forward.
Hannah, our enterprising fictional intern from the State of Mobility Mobile Employee Journeys, is back to help us understand the implications of the NAR settlement and shifting agent compensation regulations. View the full infographic journey.
Working Toward Possible Solutions
Graebel has been working closely with clients to assess their mobility programs and tailor possible solutions for them and their mobile employees. Many clients are focused on finding solutions that will still deliver exceptional experiences, understanding that is the key to a successful relocation.
While addressing changing real estate agent compensation models will be an ongoing process, there are a few scenarios mobility managers should explore to ensure mobile employees still have a positive home purchase or sale experience, and mobility program budgets remain in check.
Buyer Policy Updates
As today’s mobile employees move through the home purchase experience, many are likely to ask their companies about buyer broker compensation benefits, to help offset potentially increased closing costs due to paying their agent’s commission. Graebel is helping clients prepare for these conversations by considering what kind of support they might provide, knowing buyer agent commission benefits could go a long way in helping families accept a relocation.
In partnership with their RMCs, mobility professionals should look at current benefit offerings, possible policy updates and cost implications. Companies may arrive at different solutions, based on their unique situations and mobile employee needs. What’s more, their solution today may change in the future, as the industry better understands the implications of the settlement changes. Mobility professionals will need to be flexible – and should plan to reevaluate options once there’s more information available to make data-driven decisions.
Given the financial and tax implications, here are a few questions to analyze with RMC partners:
- How can we structure the buyer compensation benefit to support mobile employees while protecting the mobility program budget?
- Do we need to offer a buyer agent compensation benefit to ensure the mobile employee accepts the transfer?
- If yes, do we have the budget to simply add that to the relocation package? What guardrails can we put in place to balance our mobility program budget?
- If the budget isn’t available, what benefits can or should we cut to find money for buyer agent compensation? Are there any benefits/funds that can be reallocated?
- Should we structure a buyer agent compensation benefit as tax protected? What are the implications either way?
Regardless of whether companies offer agent commissions, real estate agents and mobility professionals should encourage buyers to not limit their searches based on their benefits. While some sellers may initially say they won’t cover buyer agent commissions, the entire home buying process is a negotiation that takes place over time – including discussions about buyer agent commissions. The sellers’ circumstances or mindsets may change, and they may be willing to reconsider paying agent commissions; it’s always worth asking, to not miss out on a dream home.
Home Sale and Purchase Experience
In conversations with clients, Graebel continues to hear concerns about the impacts of the settlement changes on the employee experience. Creating a positive relocation experience should remain a priority for mobility professionals, who should consider the following scenarios as they navigate the evolving real estate landscape.
Shifting Agency Representation
With real estate professionals facing the possibility of reduced compensation to represent buyers, industry experts are speculating that many agents may leave the business, while more established agents may elect to limit their representation to sellers only. This consolidation would leave mobile employees without the expertise or support needed to purchase a home, especially for first-time buyers.
Mobility professionals and mobile employees should be able to rely on their RMC partners to facilitate introductions to trusted, vetted supplier partners, including real estate professionals. Here are a few questions to ask RMC partners as they navigate potential consolidation in the industry:
- Have you heard discussions of or seen a shift in your supplier partners switching to only support sellers?
- What are you doing to ensure mobile employees have access to supplier partners that work with buyers?
- If you’re bringing new agents/brokerages into your network to make up for the speculated consolidation, what standards do you hold your partners to, to ensure high quality service for sellers and buyers alike?
Sell-Side Perspective
It won’t be automatically assumed that sellers will pay both seller and agent commissions moving forward – but that doesn’t mean that they shouldn’t consider doing so. Mobile employees will still need to sell their homes, and not offering buyer agent compensation could hinder that ability. Just as mobility professionals are working with RMCs to evaluate possible solutions to buyer agent compensation, they should consider benefits for sellers too.
Follow the journey of Selena, a fictional employee created to help mobility professionals understand the implications of the NAR settlement and shifting agent compensation regulations – this time from the seller’s perspective. View the full infographic journey.
Renter Representation and Costs
In some situations, renters must work with an agent, who receives a finder’s fee. Following the NAR settlement, this may become more commonplace, as renters will need to sign an agent agreement to be compliant with the new regulations. In many other states, landlords are currently responsible for paying the full compensation for both their agent and the renter’s agent.
Landlords, especially in tight housing markets where available rental properties are sparse and competition is high, may be unwilling to pay some or all these fees moving forward, leaving renters with an additional cost to cover. It’s unlikely to be as large a sum as homebuyers face but could equate to a month or two of rent. Given today’s cost of living and all the expenses tied to relocating, that’s not something to overlook.
Companies will need to determine their approach for supporting renter agent compensation – and providing exceptions, as needed, could be the strategic solution.
Company Cost Implications
We may begin to see buyer agent fee structure changes to make up for potential losses in commissions. For example, just as airlines began charging for bags or seat changes, buyer agents may begin adding ancillary charges to supplement their incomes. Between these and additional costs for sellers and renters, companies are facing thousands in increased mobility program costs.
Here are a few questions to consider, and talk through with RMC partners, to navigate this potential shift:
- What are the implications, particularly to program cost and mobile employee experience, of working with agents that charge ancillary fees?
- What are your recommendations for mobile employees on how to navigate or negotiate those fees?
- How can we re-balance the program budget to account for new commission costs? Where can we find cost savings?
While changes in the compensation model for real estate professionals may place additional pressure on mobility program budgets, as companies consider providing additional support to buyers or sellers, it’s important to remember that the prompt, smooth sale of a mobile employee’s home – based on whatever financial support may be required – is a major driver of exceptional experiences for mobile employees. This helps them move on to their new assignment with fewer worries and obligations. A speedy home sale also saves on other program costs, like temporary housing.
The next several months will be very telling, as the mobility industry and real estate ecosystem adjust to the new regulations. Despite the unknowns, as the industry works to understand the intricacies of changing compensation models for real estate professionals, there are several paths forward; mobility professionals need to plan for which might be the best fit for their programs.
Graebel is available to help you prepare to establish benefits and policies that work for your program. Graebel also ensures mobile employees have the information needed to accept relocations and buy or sell real estate with confidence, leading to an exceptional relocation experience.
Contact us to schedule time to review your program and evaluate your options for balancing cost management, the mobile employee experience and properly incentivizing relocations.
Members of the Graebel Partner Alliance Lending Network provided insights that supported the development of this content.